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Still Neutral on Viacom

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On Nov 22, we maintained our Neutral recommendation on Viacom Inc. (VIAB - Analyst Report), as the company’s top and bottom line surpassed the Zacks Consensus Estimate in the recently concluded quarter.

Why the Reiteration?

Viacom benefits from a well-balanced asset mix with entertainment content at its core. The company enhanced its brands worldwide through the creation and acquisition of hit programming, new channels, successful motion pictures and other forms of entertainment, including video game offerings.

Viacom benefits immensely from its agreement to disribute digital content to online video streaming companies, such as Netflix and Hulu. These businesses generate high margins of around 75%, while facilitating the company to significantly improve its bottom line.

Management is hopeful that it will be able to expand its digital content distribution deals, both in the U.S. and internationally going forward. Moreover, Viacom is generating strong free cash flow, enabling the company to maximize its shareholders’ wealth through dividend payments and solid share repurchases.

On the flipside, the cable TV industry in the U.S. is highly matured and saturated. Viacom’s flagship cable channels are already distributed and there is limited scope for driving revenues by enlarging distribution channels. Viacom has performed impressively in its digital content distribution business.

However, in the long run, these lucrative deals with online video streaming companies may act as a boomerang for the company. Moreover, online video streaming companies have posed a major threat for the cable TV operators, who may not be able to pay higher affiliate fees to Viacom since its contents can be viewed online.

Moreover, strong share repurchase plans undertaken by Viacom will not only pressurize the company’s current cash position, but may also expand the company’s financial leverage. Meanwhile, the stock price has soared nearly 61% in the current year and is currently hovering around the high end of its 52-week price range.

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